FARM DAMS - ARE THEY AN OPTION FOR THE QUEENSLAND SUGAR INDUSTRY. Mark Schuurs, CANEGROWERS Mackay Mal Wegener, University of Queensland

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1 FARM DAMS - ARE THEY AN OPTION FOR THE QUEENSLAND SUGAR INDUSTRY by Mark Schuurs, CANEGROWERS Mackay Mal Wegener, University of Queensland Abstract Sugar cane farms are the single biggest user of irrigation water in Queensland. Recent drought and unreliable rainfall patterns in areas traditionally reliant on rainfall for crop production has resulted in increasing interest in, and adoption of supplementary irrigation to help underpin production. As a result, demand for irrigation water now exceeds supply from surface and underground sources and growers who are not able to access irrigation schemes are considering other water supply alternatives. A simple spreadsheet model has been developed to accept simulated crop yield and irrigation application data from APSIM (Agricultural Production Systems Simulation Model) and evaluate investment options in on-farm water storage and reticulation. The analysis indicates that growers should consider the construction of on-farm water storages as a viable source of irrigation water. Introduction Queensland farmers terms of trade have been trending downwards over the last two decades (refer Figure 1). Costs have increased on average, much more quickly than commodity prices (refer Figure 2). Queensland cane growers have survived to date by adopting improved farm management practices and technology that has reduced costs, increased productivity or improved the reliability of production. Farmers terms of trade ( = 100) Year Figure 1 - Queensland farmers terms of trade 1970 to 1994.

2 Qld No. 1 Pool Sugar Price (indexed = 100) 1000 $ per tonne Year Figure 2 - Queensland No. 1 Pool Sugar Price 1970 to Over the years growers have explored a number of avenues in order to remain viable including increased scale, reduced input farming, percentage of fallow, crop diversification (particularly through the fallow window), value adding (garden mulch from Rocky Point in South East Queensland), green cane trash blanketing, irrigation and associated technologies, and precision agriculture. While some of these examples have been widely adopted by the industry, others have not. Recent drought and unreliable rainfall in many cane growing areas traditionally reliant on rainfall for crop production, has resulted in increasing interest in, and adoption of, supplementary irrigation to help underpin production. Three areas where this is particularly evident are the Herbert, Mackay and Bundaberg regions. While some growers in these areas have increased their area under dryland production, many growers have recognised the more substantial benefits that are afforded through irrigation. Some direct advantages of expansion through irrigation include: reduced production risk increased margins per hectare less income lag than horizontal expansion ability to borrow and service debt is improved by the removal of some production uncertainty land has an improved ability to maintain value when other factors such as sugar price or drought may significantly reduce the value of low producing non-irrigated farms investment in production increasing irrigation often provides a far better return on additional capital than an equivalent investment in additional cane land, part of which is attributable to the considerable tax benefits associated with input costs that can be grouped under sections 75B, 75D and 51(1) of the Income Tax Assessment Act increased flexibility of farming activities.

3 Other more global reasons for the promotion of more intensive farming practices include a reduction in the area of good quality agricultural land (particularly as a result of urban encroachment in the cane industry), increasing community resistance to tree clearing, and the identified need to maintain reasonable areas of natural habitat and biodiversity. As groundwater and regulated scheme water supplies have become fully committed, and unregulated streams have proven to be unreliable, many growers have questioned the viability of on-farm storages to provide some or additional water for irrigation. This paper reports on preliminary analysis conducted in the Mackay region. Methodology While economic analysis of irrigation has been conducted by the sugar industry, none of the work previously undertaken has considered irrigation investment in the context of a business subject to income tax, and eligible to claim deductions for certain irrigation expenditure. A spreadsheet model has been developed incorporating the capital and operating costs associated with six irrigation systems, expenditure on an on-farm storage, the ability to accept simulated crop yield data and water use associated with particular soil types and irrigation strategies, and conduct discounted cash flow (DCF) analyses on after tax income (Appendix 1). The DCFs are conducted over a twenty year timeframe to reflect what is considered to be a reasonable investment horizon for a grower, and to coincide with the expected life of much of the irrigation equipment. The Australian Income Tax Assessment Act contains certain provisions to encourage the development of water resources and investment in irrigation infrastructure. The government provides these provisions to help stabilise income from primary production, facilitate self reliance and hence reduce the need and cost of government support during drought. Aspects of the act incorporated in this model include marginal income tax rates, income splitting, five year averaging, Section 51(1) provisions which allow primary producers to write-off irrigation investigation and planning costs and all irrigation operating costs in the year of expenditure, Section 75D provisions which allow primary producers to depreciate the full cost of soil conservation works in the year of expenditure, Section 75B provisions which allow growers to depreciate the capital costs associated with irrigation storage and reticulation works over three years, and Drought Investment Allowance which allows primary producers to claim an additional deduction of 10% of the capital costs (up to a maximum deduction of $5,000) associated with irrigation reticulation (excludes storages for irrigation) in the year of expenditure. The capital costs for the irrigation systems were derived for farm sizes from 50 to 250 hectares. The costs associated with each system on an 80 hectare farm are shown in Table 1. Factors that will influence the selection of a particular system include soil type, the availability and cost of water and labour, water quality, slope, farm layout and equipment cost.

4 Component Winch Furrow Pivot Trickle Pump Suction Discharge Installation Mainline Submains Trickle tube Tailwater return earthwks Tailwater return pump Levelling Irrigator & hose Boom Fluming Centre pivot Capital Cost ($) 131, , , ,800 Capital Cost ($/ha) 1,648 1,254 2,365 3,335 Table 1 - Capital costs associated with each irrigation system. The operating costs and application efficiencies associated with each system on an 80 hectare farm are shown in Table 2. The application efficiency figures adopted here are thought to be readily achievable where irrigation application (and system) is matched to soil type and topography. Water losses are attributed to evaporation, runoff and deep drainage. Cost ($/Ml) Winch Furrow Pivot Trickle R&M Labour Pumping Application efficiency 75% 60% 85% 90% Table 2 - Operating costs and application efficiencies associated with each irrigation system In this analysis APSIM-Sugarcane was configured to simulate continuous cropping of Q124 where the crop was harvested green (greater than 90% of the Mackay cane crop is harvested green) on the 1 July each year, 250 kg nitrogen was applied to each crop at a depth of 100mm (BSES recommended rate is 180 kg/ha), and irrigations were applied when the fraction of available soil water fell to 50%. Climate and rainfall data for the period 1974 to 1993 was used for the simulations. In the Mackay district, on-farm irrigation storages vary in size from tailwater pits of under one megalitre (Ml), to a 5200 Ml ringtank west of Mackay at Nebo. According to the the Department of Natural Resources (DNR), who are

5 involved with many of the storages at the design or licencing stage, average cost of construction has been between $450 and $500 per Ml of storage. A number of technical factors impact on the economics of on-farm storages, and DNR is able to provide landholders with indicative information on possible storage sites, storage volume, catchment size, estimated runoff, expected evaporation and seepage, yield, area of inundation when full, wall height, bywash dimensions, and construction cost based on required earthworks. The basic steps in planning a farm water storage include: select the best site based on your water requirements, topography, catchment yield, soil types, location, area, and construction cost - it is worth taking advantage of the DNR Water Advisory Service to assist here assess the impact on farm layout - DNR can also assist with farm layout planning, Bureau of Sugar Experiment Stations, irrigation suppliers assess the licensing requirements for the works material investigation of the site survey and design application for necessary licences. Results and Discussion An example of the physical and financial information that is required by the model is shown in Table 3. Some of these numbers (available water, water applied, cane price) are calculated based on inputs such as the irrigation method selected, sugar price and CCS. Table 4 mimics output information provided by the model. The model also calculates the breakeven value of a number of key input variables, while keeping all other variables constant. Simulated yields for the period 1974 to 1993 have been captured in Table 5 for three irrigation systems on three different soil types. These results demonstrate the variability in the NPV and breakeven dam cost depending soil type, irrigation system (and strategy) and storage capacity/yield. Model runs have highlighted the need to refine the model so that it can be used as a decision support tool for growers/advisers evaluating specific irrigation development proposals. Physical Inputs Cultivated area (ha) 80 Area of cane land lost to storage (ha) 0 Irrigated area (ha) 80 Storage capacity (Ml) 240 Storage cost estimate ($/Ml) 450

6 Yield (% of volume) 100 Available water (Ml) 225 Irrigation method (w=winch;f=furrow;p=pivot;t=trickle) W Water applied (Ml/ha) 2.25 Financial Inputs Ten year bond rate 5.3% Inflation rate 0.5% Discount rate adopted 4.8% Sugar price ($/t) 320 CCS 13.5 Cane price ($/t) Harvesting & levies ($/t) 7.49 Nett cane income ($/t) Taxation Number of tax payers 2 Tax rate adopted (m=marginal;c=company) M Table 3 - Sample input variables Variable Irrigation system Winch Capital cost ($) 239,800 Operating cost ($/Ml) 101 Water cost ($/Ml) 0 NPV (20 years) ($) 42,011 Internal Rate of Return 7% Breakeven analysis (NPV=0) Storage cost ($/Ml) 679 Sugar price ($/t) 281 Reticulation capital cost ($/ha) 2,336 Total operating cost (including water) ($/Ml) 122 Table 4 - Sample output data using the input data in Table 3 on a sand soil with a plant available water content of 63mm to a depth of 1500mm.

7 Soil type Sand - plant available water content of 63mm Irrigation system Rainfed Winch Pivot Trickle Available water (Ml/ha) Effective irrigation (Ml/ha) Average yield (t/ha) Maximum yield (t/ha) Minimum yield (t/ha) NPV ($) - -36,585 42,011-12, , , ,367 Breakeven dam cost ($/Ml) ,627-1,229 Soil type Loam - plant available water content of 114mm Irrigation system Rainfed Winch Pivot Trickle Available water (Ml/ha) Effective irrigation (Ml/ha) Average yield (t/ha) Maximum yield (t/ha) Minimum yield (t/ha) NPV ($) - -60,579 49,336-14, , , ,778 Breakeven dam cost ($/Ml) ,435-1,117 Soil type Clay - plant available water content of 162mm Irrigation system Rainfed Winch Pivot Trickle Available water (Ml/ha) Effective irrigation (Ml/ha) Average yield (t/ha) Maximum yield (t/ha) Minimum yield (t/ha) NPV ($) - -26, ,132 98, ,778-93,907 Breakeven dam cost ($/Ml) Table 5 - Comparison of results using yields generated by APSIM-Sugarcane for the period 1974 to The simulated yields were discounted by 10% to account for losses associated with pests, diseases, and mechanical harvesting, and a maximum yield cap set at 161 t/ha (70% of the maximum simulated yield under full irrigation). At lower water application rates (Ml/ha) the capital costs associated with reticulation tend to outweigh the benefits, particularly when installing a trickle system. Slightly improved yields due to better application efficiency, and lower operating costs, resulted in higher NPV and breakeven dam cost figures to give the pivot system an edge on winching The model has also been used to compare discounted cashflows generated from additional purchased unirrigated cane land (purchased at market value) with irrigation development on an existing farm. These analyses highlighted the need for growers to look to maximise their production from their existing area (possibly through the development of irrigation) before investing in additional dryland cane area. This is despite the fact that the NPV does not take into account the increased value of land resulting from investment in irrigation. Conclusions This framework has made it possible to evaluate various on-farm storage and irrigation investment scenarios depending on irrigation system to be adopted, dam size, dam yield, and construction cost. However, the analyses to date have assumed a static annual storage yield, which does not reflect actual variability in runoff from season to season. The CRC for Sustainable Sugar Production is currently developing a farm water simulation model that uses APSIM, RUSTIC (Runoff, Storage & Irrigation Calculator), and MEDLI to simulate daily streamflow, runoff and storage yield figures, water use figures (where the grower may have access to

8 water from an on-farm storage and a regulated/unregulated stream), and crop yield. Output from this model will then be fed into the economic analysis to help assess the feasability, implications and optimum design of on-farm storages within sugarcane production systems. Acknowledgements The authors acknowledge the contributions of other scientists involved with this project in the CRC for Sustainable Sugar Production.

9 References Anderson JR and Griffiths WE Production risk and efficient allocation of resources. Australian J Agr Econ, Dec 1982, pp Anon Irrigation of Sugarcane. BSES/SRDC publication, 52 pp. Anon Reference Manual on Drip Irrigation for Sugarcane. BSES publication, 33 pp. Bennett J The economic assessment of large scale water projects. Central Queensland Journal of Regional Development, Vol 4 No 3-4, 1996, pp CCH Australia Limited Australian Master Tax Guide Donnet R Development Incentive Scheme - Information for Applicants. Harris TR, and Mapp HP A stochastic dominance comparison of water-conserving irrigation strategies. American J Agr Econ, May 1996, pp Heady EO Economics of Agricultural Production and Resource Use. Prentice-Hall, New York. Kingston G Benchmarking yield of sugarcane from estimates of crop water use. Proc ASSCT Conf 1994, pp Kruse EG, Bucks DA, and von Bernuth RD Comparison of irrigation systems in B.A. Stewart and D.R. Nielsen (Editors) Irrigation of Agricultural Crops, pp Agronomy Monograph no. 30, American Society of Agronomy, American Society of Crop Science, American Society of Soil Science, Madison, WI, USA. Meyer WS The irrigation experience in Australia: lessons for the sugar industry. Proc Sugar 2000 Symposium Robertson MJ, Inman-Bamber NG, and Muchow RC Opportunities for optimising the use of limited water by the sugarcane crop. Proc. Sugar 2000 Symposium Shannon E, McDougal A, Kelsey K, and Hussey B Watercheck - a coordinated extension program for improving irrigation efficiency on Australian cane farms. Proc. ASSCT 1996, pp McCown RL, Hammer GL, Hargreaves JNG, Holzworth DP, and Freebairn DM APSIM: a novel software system for model development, model testing and simulation in agricultural systems research. Agricultural Systems 50. pp Raine SR, and Bakker D Increased furrow irrigation efficiency through better design and management of cane fields. Proc ASSCT Conf 1996, pp SKM Economics of irrigation methods and programs at Bundaberg. Summary of project report prepared by irrigation consultants Sinclair Knight Merz. Willcox TG An economic evaluation of irrigation methods and programs. Final report SRDC project BS148S.

10 Appendix 1 - Model calculation sheet using input data from Table 3. On-farm catchment storage Qty Rate Cost Life ($) (years) $ 450 /Ml of yield N/A Pumps, irrigator, pivot Mains & fittings Trickle tube 0 10 Earthworks 0 30 TOTAL CAPITAL COST Operating Costs No Rate $/Ml R&M $/Ml - servicing, repairs 8.50 Labour $/Ml - moving, checking, repairing Water Scheme dependent Pumping $/Ml - electricity TOTAL OPERATING COST Dryland farming costs $/ha Variable costs excluding harvesting & levies Normal fixed costs (on an average farm size o 60 hectares) Insurance 3100 Registrations/licences 1400 Fuel km 1000 Rates 3200 Electricity 300 Wages 1250 Administration 3500 Other expenses Fixed costs/ha Discounted cash flow analysis - including reticulation works Discount rate 4.8% Income Less Additional Expenses Dam Capital Soil Taxable Taxable Net cash Dryland Change Year DIA/75B cost costs conservation Nett income Tax flow after income after Without With Operating Water deductions (S 75B) (S 75D) Income 5-year payable tax after tax tax a b c d e f g=b-(c+d+e+f) averaging NPV (a project is generally accepted if NPV>0) $42,011 IRR (a project is generally accepted if the IRR>discount rate) 7%